CNA Explains: Why is the yen so weak?

well the yen tumbled to a 24-year low against the dollar this week a level not seen since 1998 is a far cry from when currency traders used to consider it a safe haven so why is the yen so weak cna's roller limb has the low down the japanese yen used to be the go-to place for forex traders seeking shelter when markets turn stormy but the surge in the us dollar and worries about the health of asia's number two economy means this safe haven bet is having a horrible year year-to-date it's lost more than 21 against the greenback and it's expected to weaken further having broken past the 140 yen to dollar level many see 145 and 155 as the next support levels according to a recent reuters poll the biggest reason for its weakness is divergence of monetary policy while other central banks have moved benchmark interest rates higher japans have remained ultra low and that makes dollar denominated assets more attractive for investors seeking higher returns take for example the yield gap on u.s treasury 10-year note one of the safest investments you can buy it's already climbed to three percent the highest in years the 10-year jgb is 0.2 so why isn't japan raising interest rates to shore up its currency well simply put the exchange rate isn't part of the bank of japan's mandate the central bank is focused instead on keeping a lid on inflation and supporting growth most recently impacted by the pandemic the boj has kept its key interest rate in negative territory since 2016 to encourage borrowing and spending after decades of deflation it's also stuck to its yield curve control policy which aims at keeping rail interest rates low by controlling short and long term rates and that means keeping the 10-year jgb yield at around zero percent with a quarter of a percentage point wiggle room on either side but it's a costly exercise for the boj given it's pledged to buy unlimited amounts of 10-year jgbs to stop rising global yields from pushing up domestic borrowing costs too much a weekend is a double-edged sword for japanese exporters and households its depreciation helps exporters boost their overseas profit when repatriated back into the country but it also inflates import costs for energy and other raw materials usually priced in dollars and while japanese firms are reluctant to pass on their rising costs to customers for fear of losing market share they may have no choice the higher cost of goods will likely hit low-income household hardest in and in turn crim consumption and when it comes to trade the folks at ing note a safe haven currency typically needs to be backed by a strong trade surplus such that there is a natural demand for a currency in crisis the japanese yen has lost that backing from trade japan's trade deficit hit a record high in july with the data due out next week expected to be closely watched as everyone wonders when people will start yearning again for the yen for cna explains i'm roland

Channel: CNA

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Id: DGo7WqdDY7w

Length: 3min 21sec (201 seconds)

Published: Thu Sep 08 2022